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Dividend doubts creep in after Shell’s £47bn swoop for BG Group

Screen Shot 2015-04-08 at 08.12.04Article by Andrew Neil published 11 April 2015 by proactiveinvestors.co.uk

Dividend doubts creep in after Shell’s £47bn swoop for BG Group

“We think Shell’s acquisition of BG will likely be viewed as strategically smart and opportune, but should oil prices stay lower for longer, it could put pressure on UK dividends and be detrimental to UK pension investors.”

Shell’s swoop for BG Group (LON:BG.) failed to win over the Anglo-Dutch oil giant’s investors yesterday.

As BG soared, Shell shares (LON:RDSB) moved in the opposite direction and eventually posted their biggest fall since 2008.

At £47bn, the problem for boss Ben van Beurden is that some stakeholders fear he’s been too generous with his offer.

Shell’s dividend, which accounts for close to 10% of the total pay-out to UK equity investors, is also a particular concern.

“Shell has stuck its dividend reputation to the mast with this deal,” Investec oil and gas analyst Neill Morton told Proactive.

The business has committed to pay dividends of US$1.88 (£1.25) per share in 2015; that currently costs a chunky £12bn.

Next year though, providing the deal goes through in time, its dividend payment will rise to £15bn.

That’s because Shell has promised to hand BG investors 383p in cash and 0.45 of Shell’s B shares for each BG share they own.

“In my opinion, the dividend payments have now become a millstone around Shell’s neck,” added Morton.

“While we don’t expect a cut, we now see no substantial dividend growth over the next five years.”

With a dividend yield of close to 6%, Shell is one of the best paying stocks in the UK.

It’s also handing out a great deal more than its US rival ExxonMobil, which currently has a yield around 3%.

The fundamental logic of a merger always existed, according to van Beurden, who described the deal compelling from a “value perspective”.

However, Shell’s shareholders are the ones paying. Their holding will be diluted in the takeover and they’ll end up owning 80% of the enlarged group, rather than 100% of Shell.

In his efforts to comfort investors, van Beurden promised cost savings and pencilled in a $25bn stock buy-back in two years time.

That way, the company can return wealth to its investors by absorbing its own shares and boosting the value of the ones still out there.

Debt reduction will be a priority for now, but if oil prices rise as Shell expects then it plans share buy-backs from 2017.

“It’s a good deal for BG shareholders, clearly, but also good for shareholders in Royal Dutch Shell,” said Michael Clark, portfolio manager at the Fidelity MoneyBuilder Dividend Fund.

“There is no danger that Shell will change its dividend policy.”

Analysts at Barclays agree: “The confirmation of the dividend is critical to the Shell investment case, in our view,” the broker said in a note.

“The free cash flow profile of the combined group is enhanced which should, in our view, be reassuring for existing Shell shareholders.”

Others are more concerned about the wider market impact of Shell’s dividend.

 “For UK pension investors, we need to be aware that 17% of UK FTSE All Share income is oil and gas related,” said Matthew Beesley, head of global equities at Henderson Global Investors.

“We think Shell’s acquisition of BG will likely be viewed as strategically smart and opportune, but should oil prices stay lower for longer, it could put pressure on UK dividends and be detrimental to UK pension investors.”

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